Learning capitalism from the Chinese?

As government spending and expansion of the public sector in America spins out of control, many people are asking if there is any way to reverse this trend. There is. We only need to look at the example set by the most successful and largest-scale privatization in world history. That is the privatization, which is still ongoing, of the massive Chinese economy.

It may seem ridiculous that our country, allegedly the center of the capitalist universe, can learn about privatization and smaller government from the supposedly “communist” Chinese. However, sometimes initial appearances can be very deceiving.

In this case, the reality once you look below the surface of the Chinese and American economies is that ours has been trending toward socialism for decades while theirs has been trending towards capitalism since the 1970s. Accordingly, the economic growth and improvements in the standard of living of Chinese has been rising rapidly.

Meanwhile, our economy and standard of living, except for the top 1 percent who have benefited from asset bubbles, largely have been stagnant during the same period.

Yes, the Chinese were starting from an extremely low base of per-household income because of decades of socialism. Everything was nationalized. There was no private enterprise. They had no place to go but up. But that is not the whole story. They have managed to sustain unbelievably high rates of growth and improvements in standards of living now for over 30 years.

They now have the second-largest economy in the world. They are now the largest exporter in the world, recently surpassing Japan and Germany. They have the largest foreign reserves of capital, which is basically national savings, in the world at $2.5 trillion.

Meanwhile, the U.S. has become the largest debtor in the world, our exports have declined precipitously, and we only are able to fund our current account deficit because the Chinese and other governments buy our debt. Much more is happening in China than just cheap labor arbitrage, as some people believe.

First, wages have been rising rapidly and, in many parts of their country, China no longer is the cheapest source of labor relative to other Asian economies such as Indonesia, Vietnam and the Philippines. Rising wages have not slowed down the China growth engine.

Second, the Chinese have built a culture of entrepreneurship across the country. Anyone visiting China can observe this. Everyone wants to be his or her own boss, even if they are peasants just arriving from the countryside. They want to build something. They want to work hard. They’re willing to make sacrifices to improve their own life. They’re not sitting around waiting for a government handout.

Third, and this is part that most people don’t recognize, the Chinese have imposed an extremely high degree of market discipline and basically a corporate structure on their government sector. This is an often overlooked and key element of how they have kept the pace of privatization and economic growth moving forward all of these years. How did they do this?

Government jobs in China are considered prestigious and high-paying. But they are not easy at all. Unlike in America, in China the high status and benefits of a government job come with a similarly high degree of responsibility, accountability and severe penalties for failure and incompetence. Basically, it is more like an executive position in a corporation than a secure, bureaucratic position like most government jobs in America.

It is not unusual for government officials who are exposed for being incompetent or unusually corrupt (some corruption in China is considered normal) to be not only fired but even imprisoned. Incompetence in government here in America is considered almost guaranteed.

As for corruption here, in the rare situation that someone is caught and prosecuted here it’s often very difficult to get a conviction or a significant prison term. In China they have no trouble meting out justice to government officials who have disgraced themselves, and everyone there knows it. It is a huge deterrent against bad behavior.

More specifically, in China government control, especially as related to economic-development issues, is mostly given to the local authorities. With that control comes the responsibility to meet certain economic-growth and social-improvement targets. If those targets are met or exceeded, the local officials are rewarded.

If they fail to meet the targets, there are certain penalties depending on the reasons for the failure and the severity of the failure. In America we do things almost the complete opposite way. Local officials do not have much control. Regulations and mandates are piled onto them by federal and state government. If they succeed, nobody cares except their local community. If they fail, they can always blame the federal and state government for all the regulations that were placed on them and how little control they have.

Failure is an excuse to blame somebody else and demand more money to fix the problem. You often can be rewarded for failure as a bureaucrat in our system of government because failure is a way to get more resources allocated to your area.

Most of your personal success or failure as a government worker in America is determined by your skills at positioning yourself away from the blame and shifting it onto others. These are political skills, not economic skills. The goal of most American public-sector workers is just to keep their heads down and hold onto their jobs until they become eligible for their huge pension benefits. Then they usually quit.

There is no incentive to help grow the economy or improve the lives of people, so that is not what most government workers care about doing. Some other government officials only enter the system for a short time so they can use the regulatory knowledge and relationships accumulated to get a high-paying private-sector job lobbying the government for some special-interest group. Of course, this behavior also does not benefit our society, but rather just benefits these individuals and the interest groups that they represent.

There always will be, and there are, some people in government who just want to do the right thing for its own sake, but that is not most people. Most people make decisions based on incentives, and the incentives for government workers in America are all wrong. Whatever you think of the Chinese and their poor track record on human rights, you can’t argue with their economic success.

For all the disadvantages the Chinese face, and all the advantages we have here in America, their economy has been growing 11 percent to 12 percent in good years and 5 percent to 7 percent in bad years. That compares with our economy that grows 3 percent to 4 percent in good years and shrinks in bad years. Their workers enjoy rising wages, while our workers face shrinking wages. Their property values have been rising, while ours are falling. They are accumulating more and more savings, while we are running deeper and deeper into debt. They are building new infrastructure, while ours is collapsing.

They must be doing something right, and maybe we should start paying more attention to what those things are.